University challenge: The £50,000 question

Features writer at City A.M. covering personal finance and trading. Reach me at katherine.denham@cityam.com.

For many young people and their parents, university doesn’t quite bring the independence they expect. (Source: Getty)

Katherine Denham

The new university term is now in full swing, and you might be relieved that your child is on their way to becoming a fully-fledged adult.

But for many young people and their parents, university doesn’t quite bring the independence they expect.

Tuition fees have gone through the roof, with most British students now forking out £9,250 per academic year. This doesn’t even cover the costs of living, which can amount to more than £11,000 per year.

Of course, the vast majority of students will take out a loan to cover these costs, but many parents and grandparents are keen to step in to prevent their child from starting their adult life in debt.

However, it’s important to give a few things some thought before you foot the bill.

Look at the whole picture

It’s always important for parents to look at their own finances and make sure they can afford to help in the first instance, says Liz Alley, head of financial planning operations at Brewin Dolphin.

You don’t want to end up running into financial difficulty later in life, so estimate the cost of paying for university and look at your cash flow to figure out whether you’ve got enough money to cushion the blow after paying the fee each year.

While tuition fees are a huge expense, the bigger problem is arguably the cost of living. The amount a student gets from a maintenance loan is largely dependent on their parents’ income, which suggests (albeit in an offhand kind of way) that parents are expected to subsidise their child during their student life.

So even if your child takes out a maintenance loan, don’t underestimate the other costs that could coincide with university.

In fact, research from American Express shows that British parents are spending an average of £3,662 just to send each child to university, and many parents are simply not tuned in to these other costs associated with higher education.

Alley echoes this, saying tuition fees and basic living costs are not the only expenses students will have.

“Materials such as books, laptops, and stationary all add up, as do unexpected trips home to see family and socialising or nights out to recuperate after hard days of studying. These are the hidden costs parents might factor in if they want to help out.”

To pay or not to pay?

Your child will gradually pay off the debt for most of their working life, but a student loan will not affect their credit score.

It actually functions more like tax because it’s proportionate to income, and while the interest on a student loan is relatively high, it differs to most loans in that it’s wiped off after 30 years. So it’s pretty much a win-win from a financial perspective.

Many would argue that a loan is also a good way of teaching young people about managing their finances. Dan Farrow, director of SBN Wealth Management, says parents shouldn’t make life too easy for their children, adding: “responsibility for paying off debt should be appreciated as a life lesson.”

Rather than paying for their tuition and living costs, you might be better off helping your child get a deposit together to buy a house – either now or in the future.

In fact, if you’re planning on paying for accommodation, it’s worth comparing the cost of buying a property in the university town to paying three years of rent, says Farrow. If it makes more financial sense to buy, then it might help children learn landlording skills at the same time.

Nurture their ambition

If the financial burden falls on the shoulders of your children, they will be forced to think long and hard about whether they are committed to the course they’ve chosen. It might even make them consider whether university is the best option for them.

“Paying your child’s university fees sets a trend for how your money is going to work in the future,” says Duncan MacIntyre, UK chief executive of Lombard Odier.

“Even if you’re a multi-billionaire, what message are you going to give to your child if you give them an allowance of £100,000 a year to go to university? For the right child, that might work. But for another child, it gives them no incentive.”

American Express director Jenny Cheung says it’s important to inspire a smart approach to money in your children. “As students knuckle down to their studies, parents can make sure they are equally as smart with their spending. Set yourself a budget and try to stick to it as much as possible – and encourage your children do the same.”

She also points out that encouraging your child to take up a part-time job over the course of their degree could help reduce the financial stress.

Of course, investing is also a good way to help build an education fund. “For families who have young children, the message is simple – save little and often, so it saves a headache when your child turns 18,” says Alley.

Instead of keeping savings in cash or sitting in the bank, investing money in a junior ISA would make savings work harder.

A maximum of £4,128 can be invested into these tax efficient wrappers each year. But if a family invested just £100 per month over the next 15 years, they could be sitting on £25,000 by the time their children receive their A-level results in 2032.

But the more that can be saved, the less of a burden the costs will be when children reach university age.